September 2017

Pan European property equities had a disappointing month (-3.5%) when viewed in GBP. Once again currency was a driver and European stocks ex UK when viewed in EUR returned +0.2%, modest but at least positive. After so many months of steady weakening, GBP found a floor against EUR and rallied +4.5% in the month.

At the country level, the UK property names did not follow the currency and collectively fell -1.4%. However within the group there was much dispersion. The ongoing weakness amongst retail focused names persisted with Intu (-7.3%) and Hammerson (-2.4%). There has been little investment activity in prime UK shopping centres this year and the rumoured pricing on the sale of Intu’s half of Chapelfield in Norwich and a small stake (7%) in Bluewater has confirmed yield expansion (price falls) in the asset class. The other side of the retail coin, logistics, continues to the ‘asset class de jour’ and Hansteen (+5.9%) rose on the expectation of a return of capital through a tender offer at a premium following the sale of its European assets. Empiric Student Property fell 10% on a profit warning with its interim results. The student accommodation sector is in good health but has an operational focus which requires specialist skills and the issues at ESP are company specific. The fund holds only Unite (+15.4% YTD).

The weakness in retail focused names was Europe wide with Germany’s Deutsche Euroshop down -4.4%, Wereldhave (-3.0%) and Unibail (-3.6%). Not a single retail focused Continental European company has produced a positive return year to date, the negative market view is wholesale.

Strong performance came from Ireland with solid growth from Green REIT and Hibernia. Yields are compressing in the Dublin office market as investors now expect the heightened speculative supply to be absorbed faster than previously expected. Stocks with exposure to other major European cities also continue to perform with Paris focused Gecina (+4.8%) and Fonciere des Regions (+5.8%). Sweden was a strong performer as the Riksbank continues to maintain a dovish approach and the real estate businesses all offered positive expectations on rental growth amidst the sustainability of the Swedish economy.

The Trust’s NAV fell -3.07% in the month slightly less than the benchmark at -3.43%. The 30th September marks the interim of the financial year and the Trust’s NAV rose +10.4% whilst the benchmark rose +8.1%. The share price return has been even stronger at 17.6% as the discount tightened considerably.

The interim valuation of the physical property portfolio resulted in a modest net gain of £2.2m as we saw rental growth particularly in our industrial/logistics assets. The sale of the office building in Wimbledon is proceeding as we had hoped and we expect the process to be finalised in early November.